Question 1

Earl Lee Riser Alarm Co. issued $10,000 of bonds on January 1, 2018. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds.  What would be the total interest expense recognized for the bond issue over its full term?

Accepted Answer

($400 × 2 × 20) + ($10,000 - 9,080) = $16,920

Question 2

The interest rate that determines the amount of interest expense each interest date is referred to as the:

Accepted Answer

The effective rate takes into account any compounding of interest and is the rate that determines the actual amount of interest expense or income each interest period. The stated rate, expense rate, and cash rate may be different or the same as the effective rate depending on the terms of the loan or investment.

Question 3

When bonds and other debt are issued, costs such as legal costs, printing costs, and underwriting fees are referred to as debt issue costs. When debt issue costs are incurred:

Accepted Answer

Debt issue costs are amortized over the life of the debt, which effectively increases the interest expense beyond the stated interest rate, reflecting the increase in the effective interest rate.

Question 4

Gene Poole Co. issued $10,000 of bonds on January 1, 2018. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds.  What is the book value of the bonds on December 31, 2019?

Accepted Answer

Semiannual effective rate = $409 / $9,080 = 0.045
Interest expense = $409 + ($9,107 × 4.5%) = $819
Cash Payment 4 = ($9,107 × 4.5%) - $400 = $10
Book value = $9,107 + $10 = $9,117

Question 5

When bonds are sold at their face amount (no discount, no premium) and the effective interest method is used, at each interest payment date, the interest expense:

Accepted Answer

When bonds are sold at their face amount, the effective interest method allocates the same amount of interest expense to each interest payment date. Therefore, the interest expense remains the same.

Question 6

On January 1, 2018, Ozark Minerals issued $20 million of 9%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Ozark's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 99. Ozark applies International Financial Reporting Standards (IFRS). Upon issuance, Ozark should:

Accepted Answer

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Question 7

Warren Peace Bookstore issues a note with no stated interest rate in exchange for a building. In accounting for the transaction:

Accepted Answer

C) Both the note and building are recorded at the fair value of the note or the fair value of the building, whichever is more clearly determinable. This is in line with the principle that when the fair value of either the note or the building is more clearly determinable, it should be used as the basis for recording the transaction. This approach ensures that the assets and liabilities are recorded at amounts that reflect their true economic value.

Question 8

On January 1, 2018, Red, Inc. borrowed cash by issuing a $500,000, 5-year note that specified 6% interest to be paid on December 31 of each year and the $500,000 to be paid at maturity. If the note had instead been an installment note to be paid in four equal payments at the end of each year beginning December 31, 2018, which of the following would be true?

Accepted Answer

Because the note is reduced each year in an installment note, interest expense is the effective rate times a reduced amount each year. When a note is paid at maturity instead, the interest is the same each year.

Question 9

Shaq Corporation issued $10,000 of bonds on January 1, 2018. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds.  What is the effective annual rate of interest on the bonds?

Accepted Answer

$409 / $9,080 = 0.045 semi-annual rate
0.045 × 2 = 0.09 annual rate

Question 10

When bonds are sold at a discount and the straight-line interest method is used, at each interest payment date, the interest expense:

Accepted Answer

When bonds are sold at a discount and the straight-line interest method is used, the interest expense remains the same at each interest payment date. This method allocates the discount evenly over the life of the bond.

Question 11

Tim Burr Lumber issued bonds at a premium. In the bond amortization schedule:

Accepted Answer

The answer of Tim Burr Lumber issued bonds at a...

Question 12

On June 30, 2018, L. N. Bean issued $10 million of its 8% bonds for $9 million. The bonds were priced to yield 10%. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, how much bond interest expense should the company report for the 6 months ended December 31, 2018?

Accepted Answer

10% × ½ × $9 million = $450,000

Question 13

Ferris Wheeler Co. issued $10,000 of bonds on January 1, 2018. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds.  What is the interest expense on the bonds for the year ended December 31, 2019?

Accepted Answer

Semiannual effective rate = $409 / $9,080 = .045
Interest expense = $409 + ($9,107 × 4.5%) = $819

Question 14

DeKay Dental Supplies issued $10,000 of bonds on January 1, 2018. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds.  What is the stated annual rate of interest on the bonds?

Accepted Answer

$400 / $10,000 = 0.04 semi-annual rate
0.04 × 2 = 0.08 annual rate

Question 15

During 2018 Marquis Company was encountering financial difficulties and seemed likely to default on a $300,000, 10%, four-year note dated January 1, 2016, payable to Third Bank. Interest was last paid on December 31, 2017. On December 31, 2018, Third Bank accepted $250,000 in settlement of the note. Ignoring income taxes, what amount should Marquis report as a gain from the debt restructuring in its 2018 income statement?

Accepted Answer

$300,000 + 10% ($300,000) - 250,000 = $80,000

Question 16

Harrell's Barrels issued $100 million of 6% convertible bonds at 101. Each $1,000 bond is convertible into 45 shares of Harrell's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 98. 
-Harrell applies U.S. GAAP. Recording the issuance of the bonds would cause an increase in Harrell's:

Accepted Answer

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Question 17

The interest rate that determines the amount of cash interest paid each interest date is referred to as the:

Accepted Answer

The stated rate is the rate that is explicitly stated in the loan agreement or bond indenture as the rate used to calculate the cash interest payments. This is the rate that is used to determine the amount of interest to be paid to the holder of the bond or loan on each interest date. The market rate is the rate that is prevailing in the market at any given time for similar debt instruments, and it is used to determine the fair value of the bond or loan. The cash rate and effective rate are not correct answers in this context.

Question 18

Patrick Rach International issued 5% bonds convertible into shares of the company's common stock. Rach applies International Financial Reporting Standards (IFRS). Upon issuance, Patrick Rach International should record:

Accepted Answer

Under IFRS, convertible bonds are considered a hybrid of both debt and equity. As such, the proceeds of the bond issue should be split into two parts: the portion attributable to the debt instrument (the bond) and the portion attributable to the equity instrument (the conversion option). Therefore, the bond proceeds should be split and recorded partly as a liability (debt) and partly as equity.

Question 19

In a ten-year installment note, the portion of the periodic installment payment in the third year that represents interest is:

Accepted Answer

Each year the portion of the payment that represents interest gets smaller as the balance declines and the interest rate remains the same.

Question 20

Harrell's Barrels issued $100 million of 6% convertible bonds at 101. Each $1,000 bond is convertible into 45 shares of Harrell's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 98. 
-Harrell applies International Financial Reporting Standards. Recording the issuance of the bonds would cause an increase in Harrell's:

Accepted Answer

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Quiz 14: Bonds and Long-Term Notes

Earl Lee Riser Alarm Co. issued $10,000 of bonds on January 1, 2018. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds. What would be the total interest expense recognized for the bond issue over its full term?

The interest rate that determines the amount of interest expense each interest date is referred to as the:

When bonds and other debt are issued, costs such as legal costs, printing costs, and underwriting fees are referred to as debt issue costs. When debt issue costs are incurred:

Gene Poole Co. issued $10,000 of bonds on January 1, 2018. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds. What is the book value of the bonds on December 31, 2019?

When bonds are sold at their face amount (no discount, no premium) and the effective interest method is used, at each interest payment date, the interest expense:

Warren Peace Bookstore issues a note with no stated interest rate in exchange for a building. In accounting for the transaction:

Shaq Corporation issued $10,000 of bonds on January 1, 2018. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds. What is the effective annual rate of interest on the bonds?

When bonds are sold at a discount and the straight-line interest method is used, at each interest payment date, the interest expense:

Tim Burr Lumber issued bonds at a premium. In the bond amortization schedule:

Ferris Wheeler Co. issued $10,000 of bonds on January 1, 2018. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds. What is the interest expense on the bonds for the year ended December 31, 2019?

DeKay Dental Supplies issued $10,000 of bonds on January 1, 2018. The bonds pay interest semiannually. This is a partial bond amortization schedule for the bonds. What is the stated annual rate of interest on the bonds?

The interest rate that determines the amount of cash interest paid each interest date is referred to as the:

Patrick Rach International issued 5% bonds convertible into shares of the company's common stock. Rach applies International Financial Reporting Standards (IFRS) . Upon issuance, Patrick Rach International should record:

In a ten-year installment note, the portion of the periodic installment payment in the third year that represents interest is: